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Is Microsoft the Right Stock to Retire With?

Stocks that give retirees what they want are incredibly valuable.

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. Let's figure out what makes a great retirement-oriented stock, then examine whether Microsoft(Nasdaq: MSFT) has what we're looking for.

The right stocks for retireesWith decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.

Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.

Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.

Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.

Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Microsoft.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$235 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

4 years

Pass

Free cash flow growth > 0% in at least four of past five years

3 years

Fail

Stock stability

Beta < 0.9

1.07

Fail

Worst loss in past five years no greater than 20%

(44.4%)

Fail

Valuation

Normalized P/E < 18

14.4

Pass

Dividends

Current yield > 2%

2.3%

Pass

5-year dividend growth > 10%

7.2%

Fail

Streak of dividend increases >= 10 years

5 years

Fail

Payout ratio < 75%

23.1%

Pass

Total score

5 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Microsoft has a reputation for being more of a growth stock than a conservative pick for retirees. But as the business has matured, growth is harder to come by, and with many retirees owning long-held shares of Microsoft with big capital gains, tax considerations play a role in wanting to hang onto them.

Microsoft dominates the PC operating system and office-based software niches with its Windows and Office products. But many see that dominance eroding over time as people move away from PCs and toward mobile devices, where Microsoft has a much weaker presence. With Google(Nasdaq: GOOG) and Apple(Nasdaq: AAPL) leading the charge toward tablets and smartphones, Microsoft has largely been left behind.

That's not a fatal flaw for conservative investors, though. The key is how long Microsoft's cash-cow businesses will last, and whether the current stock price makes shares a bargain despite the possibility of a decline in those core offerings.

Moreover, Microsoft isn't completely without growth prospects. The company has moved into virtualization and also made a recent splash with its Kinect motion-sensor for its Xbox gaming system, which put Sony(NYSE: SNE) on the ropes with its uninspired competing Move controller.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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